Posted on 03/27/2002 11:13:30 PM PST by sell_propaganda
LOS ANGELES — With no obvious driver to power an economic recovery, economists with the UCLA Anderson Forecast predict that the national economy is looking at a “very sluggish period ahead,” with considerable risk of another recessionary dip.
In his report titled “This is Our First Business Cycle,” Edward E. Leamer, director of the UCLA Anderson Forecast, and economics professor at The Anderson School at UCLA, notes that past recoveries have been fueled by consumer spending on goods and real estate - essentially “consumer cycles” driving the economy. But since these key sectors have remained steady throughout the recent recession and mild turnaround, the current climate will grow hotter only if powered by an increase in business investment.
But Leamer has his doubts about increased business investments in the near future. “Business investment in pursuit of technological innovations has long waves that last a decade or more — a peak in 1980 and another in 2000. It is highly unlikely that there will be a sharp recovery of business investment in the next year or two,” he notes.
The report also takes an up-close look at the Internet Rush and its lasting effects on the current economy. Leamer notes that the Rush increased productivity (output per hour), but not corporate profits, and sustainable economic growth requires both. “The two Ps (productivity and profitability) went their separate ways in 1998. The mad dash to have the coolest Web site was supported by a surge in investment in equipment and software, but profits completely stalled and the ratio of profits to investment took a nosedive,” Leamer writes.
Leamer speculates that the Internet is actually killing profits while new communications technology is exacerbating the problem — two areas believed by many to be inherently positive factors for the economy.
“The Internet has fundamentally changed retail competition, affecting especially the capacity — dependent sectors including hotels, airlines, autos, PCs, wireless and so on,” Leamer said. “The ability of customers to shop without cost greatly increases the intensity of competition.”
He notes that the Internet Rush created three imbalances in the economy. Businesses invested as if profit were not the goal, consumers spent as if scarcity were a problem of the past, and portfolio managers put most of their eggs in the U.S. basket. How well and how fast these imbalances are corrected will determine the course of the economy in the next several years.
“Correction of the business investment imbalance created the recession of 2001, but correction of the other two imbalances is still ahead of us,” Leamer said. “A rapid shift from a spending mode to a savings mode by consumers or a rapid shift out of U.S. dollar assets by global portfolio managers would cause another recession.”
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